Receivables Ratios & Analysis

Concept

Accounts Receivable Turnover

A/R Turnover = Net Credit Sales / Average Accounts Receivable. This ratio measures how many times per year a company collects its average receivables. A higher ratio indicates more efficient collection.

Concept

Days Sales Outstanding (DSO)

DSO = 365 / A/R Turnover. This tells you the average number of days it takes to collect a receivable. Lower is better — it means faster collection.

Example

Calculation

Net credit sales = $1,200,000. Beginning A/R = $80,000, Ending A/R = $120,000. Average A/R = $100,000. A/R Turnover = $1,200,000 / $100,000 = 12 times. DSO = 365 / 12 = 30.4 days.

Key Point

CPA Exam Tip

The CPA exam frequently tests the relationship between the allowance method, write-offs, and their effects on financial ratios. Remember: a write-off does NOT change NRV, total assets, or net income.

Notes Receivable

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